Real Estate Partner, Craig Coan, shared his insights about what’s next for L.A.’s resilient real estate sector. Below are excerpts from the L.A. Times B2B Publishing feature:

Q: What are the key opportunities and risks for developers to be aware of in 2025?

Interest rates and new regulations are risks for developers. For example, sales of real estate properties in Los Angles are being negatively impacted by high interest rates and the ULA tax. In California, regulations and laws don’t always lead to the intended outcomes. Ballot propositions can be long and hard for the average voter to understand. Since legislators aren’t typically real estate professionals, decisions are often made without proper facts or context. Unfortunately, the “one size fits none” approach often results from these new initiatives and laws.

Q: What do you consider to be the most meaningful positive trend in commercial real estate lately?

The strength of retail. For several years, there was a lot of talk about the death of retail and brick-and-mortar stores. It’s true that retail was overbuilt, and many underperforming malls with large anchor stores had to adjust. However, we’re seeing neighborhood and community shopping centers getting stronger. In Los Angeles, retail vacancy rates are about 5.5% lower than the national average. Some fast-casual restaurants are leaving California due to high operating costs, but private equity firms and publicly traded companies are pushing for continued growth to maintain stock prices and valuations. While people say office space is overbuilt and may never fully recover due to generational shifts, I believe office building owners are focusing on amenities to make return to the office more appealing, similar to what has happened with retail.

Q: Any negative trends you hope will go away?

I’d like to see successful companies stay in California. The state’s strong economy attracts top talent. While we need to create affordable housing for younger generations and those priced out of the market, overregulation and excessive taxation could drive companies out. It’s a delicate balance, but companies must prioritize their shareholders. I’ve heard from many operators that doing business in California is becoming too difficult. If that sentiment becomes widespread, it could create a bigger problem.

Q: How are current interest rates affecting property demand and pricing in various segments?

In ground-up development, interest rates are not as big of an issue. Debt is often still cheaper than equity, so if a developer has tenants lined up, can get entitlements quickly (which is a big if) and build at a reasonable cost, short-term debt can be profitable. On the valuation side, cap rates are higher due to rising interest rates, and sellers are hesitant to sell at lower prices unless they have no choice or have loans maturing that they can’t refinance profitably.

Q: How are institutional investors adjusting their real estate portfolios in response to current market conditions?

Investors need to deploy capital, and they’re targeting sectors where the risk-reward ratio makes sense. Multifamily developers and investors are increasingly shifting to self-storage properties. Industrial real estate remains strong and requires less hands-on management than retail, multifamily or office properties.

Q: What alternative financing models are gaining traction in the real estate sector?

We’re seeing a lot of short-term, high-interest construction and bridge financing from non-traditional lenders like hedge funds. With interest rates as high as they are, non-traditional lenders are stepping into the real estate market, often through debt funds that provide more flexibility to borrowers. These loans usually come with hefty fees, both origination and exit, but with higher loan-to-value (LTV) ratios, there’s value in having more flexible financing options.

Q: What do CRE tenants need to be thinking about as they seek new spaces in 2025?

Understanding your leverage with landlords. The market can vary significantly from street to street, and landlords have different tax bases. From a valuation perspective, landlords prefer long-term, fixed-income leases for better loan terms, while tenants are more focused on short-term EBITDA. Knowing where you can provide value to the landlord and get benefits in return is crucial. With the upcoming election and inflation easing, there may be some market hesitancy until after November. Lawyers can assist with negotiating favorable market terms, but brokers typically have a better pulse on the market.

*This roundtable was originally published in the Los Angeles Times and can be accessed here.